Pick n Pay CEO
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The newly appointed CEO of Pick n Pay warned that while a turnaround of the embattled group could take years, he is confident that a laser-like focus on individual stores and relationships will help restore the passion and energy that is essential for successful retailers.
Sean Summers, who returned as CEO at the end of September after a 16-year hiatus, was on Wednesday tasked with unpacking the details of the more than 50-year-old group’s first-ever loss. He conceded that many of the group’s stores had become unattractive to shoppers, while it has also been missing the mark in terms of its relationship with suppliers.
Sustained losses
Pick n Pay, now valued at about R13 billion on the JSE, has seen its share price more than halve in 2023, and it crashed more than 12% on Wednesday. It reported that group turnover rose just over 5%, versus selling price inflation of just over 8%, while its core Pick n Pay business barely saw any growth. Battered by load shedding, promotional activity of competitors, and issues with its supply chain, it swung into a R571 million loss from just over R453 million previously.
Summers said that despite being on the back foot in a number of areas, Pick n Pay had bright spots as well, including stellar performances from its discount chain Boxer, as well as Pick n Pay Clothing. Retail was a cyclical business, he said, and Pick n Pay has been through downturns before. Summers, who spent more than three decades with the group before leaving in 2007, told News24 he hasn’t underestimated the extent of the effort required for a turnaround.
Extraordinary opperutnity
“I think to be realistic, it’s pretty much as I expected. I think I’m close enough to this business, still, even though I’ve been away from the business, you still understand what drives these businesses fundamentally.”
He said:
I’ve always learned in life things are never as bad as they seem or never as good as they seem. But when it comes to companies that are in decline, they are usually worse. So, I didn’t have high expectations when I arrived.
He added, however, there was an “extraordinary opportunity” for a company comeback, saying his first task will be on the core Pick n Pay brand, staff morale, the quality of merchandise, and the relationship with customers.
“Everybody shops in our stores every day, so you can’t fool people, they know what the truth is. The truth is, today, that when you go into our stores, they are not as appealing as they have always been, not as friendly as they have always been, and that is what we will turn around.”
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Profit slump
Pick n Pay was hit by R565 million in incremental abnormal costs in the period, including R259 million for employee restructuring, R190 million net incremental energy costs, and R116 million for duplicated supply chain losses. The latter related to its switch to a new distribution centre in Gauteng, while net finance costs jumped 47.3% to R913 million. Its gross profit margin fell almost a full percentage point to 18.5%.
Including franchises, the group has a total store base of just over 2 000 SA stores, about half of which are supermarkets. Pick n Pay SA sales grew only 0.3% to R34.6 million. Its discount chain Boxer fared better, growing sales just over 16% to R17.4 billion but grew just over 4% on a like-for-like basis.
Pick n Pay added 27 Boxer stores, bringing it to 454 in its first half, and is heavily pushing this format, planning a total of 55 by year-end. It had planned more, but says it is being hobbled by slow processes in securing items like permits from local councils and municipalities, something as frustrating to it as it is for the average South African.
Pressure was particularly acute in its namesake business. Pick n Pay recently split its main SA brand into two, QualiSave, which is aimed at lower- to middle-income customers and Pick n Pay, whose focus will be the middle-to-top-end of the market.
These banners struggled to compete in an increasingly promotional market as load shedding squeezed margins, Pick n Pay said, while Boxer benefitted, among other things, from its basic commodities focus, as well its quality butchery, bakery and fresh produce offer. Pick n Pay Clothing – just under 350 stores – grew its turnover almost 14%.
Summers said the strong management teams at Boxer and Pick n Pay clothing demonstrated the importance of leadership, saying his immediate focus will therefore be on the core Pick n Pay brand. After rounds of restructuring under previous CEOs, Summers added he didn’t think further cuts would be necessary, emphasising while these may show results on the balance sheet, they may not truly reflect the hit to the “social fabric” of an organisation.
“It’s very, very early stages, but when I just look at the structures that are now in place, in terms of how we are running and looking after our people at the operational level. I think we need to refocus a lot of the energy of the company back into running stores, as opposed to running the support office in the back end of the business.”
He added:
Boxer is very focused in terms of its business, it’s a highly motivated business, so that comes back to the people again. The stores are appropriate, they are in the right place, their ranging and merchandising is absolutely spot on in the market in which they appeal.
Another issue for Pick n Pay has been suppliers, with Summers saying during an investor presentation the fact that the group has fallen behind competitors was well-known in the supply-chain industry. He added some of the group’s biggest suppliers had reached out to say there was a need to sit down and talk.
Summers told News24 this would mean focus on moving volumes, including in terms of the value proposition and product mix, and that there had been too much focus on “rebates, schemes and structures, as opposed to just getting out there and buying and selling”.
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Market pressure
Pick n Pay warned on Wednesday that tough trading conditions are likely to persist in its second half, with Summers saying the performance of Boxer didn’t quite reflect the pressure that its customer base is under, with food inflation outstripping the pay raises of most. Indications that another interest rate hike may be on its way also didn’t bode well, he added.
Pick n Pay did say it expected some pressure to ease in its second half, including due to seasonal effects, lower energy costs after pushing, among other things, more efficient equipment, as well as no repeat of its duplication in supply-chain costs. It still expects profit in its second half to be lower than the same period in the prior year, while Summers indicated that the chances of a final dividend are not “particularly great”.
“The full-year earnings may not be a thing of beauty … get over it … it’s a journey,” said Summers during the presentation, adding that the group is going to “win your love and patronage again.”
The group’s shares closed more than 12% lower, bringing their year-to-date loss to over 55%.
Shaun Murison, senior market analyst at IG, said the challenging conditions facing Pick n Pay would necessitate “strategic leadership and effective cost management”. Summers, a veteran, had presided over a successful period as CEO previously, he added.
But Sasfin Wealth senior equity analyst Alec Abraham said a turnaround would be a long process that could stretch for up to two years, and the group appeared to be “starting from scratch” in terms of reviewing its strategy.
“Details on the new strategy are scant … a rah-rah session with staff and lunch with suppliers is not going to fix everything overnight,” he said.
There was also execution risk, said Abraham: “For instance, the hints that the multi-skilling programme appears to be a little bumpy in its operational execution”. In its 2023 year, Pick n Pay had reached agreement with its largest union, the South African Commercial Catering and Allied Workers Union (Saccawu), allowing it to schedule employees for more than one task during a single shift for the first time.
Boxer’s volume decline also suggests that Massmart’s Cambridge and Shoprite’s “hold on the lower income market in peri-urban areas appears impenetrable,” Abraham added.
